MANAGEMENT INFORMATION Lecturer: Nguyen Bich Ngoc (ACCA, PhD) 17014127751491000000 Main Contents • Costing and pricing • Budgeting and forecasting • Performance management • Management decision making www.com 2 Assessment format • 1.5 hour computer-based assessment • 20% of the marks are allocated in one scenario-based question. • 80% are from 32 multiple choice questions • 55% pass mark www.com 3 Assessment format Specifications grid Weighting Syllabus area (%) Costing and pricing; Ethics 25 Budgeting and forecasting 25 Performance management 25 Management decision making 25 100 www. The fundamentals of costing • What is cost accounting • Basic cost accounting concepts • Cost classification • Ethics www.com 5 What is cost accounting? • Cost accountant able to provide answer for question about cost and revenue, enables management: – Assess the profitability – Determine appropriate selling – Put a value on inventory • The cost accountant also needs to provide information to help provide forecasts or estimates for the future.com 6 What is cost accounting? • Costing system provides the foundations for an organisation’s internal financial information system for managers. • Cost accounting systems are not restricted to manufacturing operations.
• Cost accounting is concerned with providing information to assist the following. – Establishing inventory valuations, profits or losses and balance sheet items – Planning – Control – Decision-making www.com 7 What is cost accounting Management Accounting vs. Financial Accounting Management Accounting Financial Accounting Information mainly Internal users, e. produced for Managers and employees Shareholders, creditors, lenders, banks, government Purpose of To aid planning, control To record financial performance information and decision making and position in a period Legal requirements No Yes (limited companies) Formats No set format – managers Limited companies must produce decide on content & financial accounts presentation Nature of Financial & non-financial Mostly financial information Time period Historical & forward- Mainly an historical record looking www.com 8 Basic cost accounting concepts Functions and departments Chocolate cakes production: Board of directors Production Administration Marketing Mixing Baking Stores www.com 9 Basic cost accounting concepts Definition • Cost objects: A cost object is anything for which we are trying to ascertain the cost • Cost unit: is the basic measure of product or service for which costs are determined • Composite cost units if more than one cost units are used.
Normally, they are used in service organisations.com 10 Cost classification The classification of cost Types of Direct or Indirect Behavior Control Function expense www.com 11 Cost classification According to function Production costs Finance costs Administration costs Function Selling costs Distribution costs Research costs www.com 12 Cost classification According to function Production costs are those incurred when raw materials are converted Non-Production costs into finished and part- (Period costs) are costs not finished goods. directly associated with the production processes in a manufacturing organisation.com 13 Cost classification Materials Labour Types of expense Expenses www.com 14 Cost classification Direct/Indirect Total cost Direct (Prime) Indirect Cost (Overhead) Cost Direct Direct Direct Indirect Indirect Indirect Material Labour Expense Material Labour Expense www.com 15 Cost classification Direct/Indirect • Direct cost: A direct cost is a cost that can be traced in full to the cost unit. • Indirect cost: A cost that is incurred which cannot be traced directly and in full to the cost unit.com 16 Cost classification Direct RM Those materials that become an integral part of the product and that can be conveniently traced directly to it. Example: Rubber/Metal for car production www.com 17 Cost classification Direct labour Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers www.com 18 Cost classification Direct expenses • Expenses are incurred on a specific product other than direct material cost and direct wages • Example: – The cost of special designs, drawings or layouts – The hire of tools or equipments or a particular job – Maintenance cost of tools fixtures … www.com 19 Cost classification Indirect cost • Production overhead: incur in the factory from receipt of the order until its completion - Indirect material - Indirect wages - Indirect expenses • Administration overhead • Selling overhead • Distribution overhead www.com 20 Cost classification Summary Direct/indirect cost Materials = Direct materials cost + Indirect materials cost cost + + + Labour cost = Direct labour cost + Indirect labour cost + + + Expenses = Direct expenses + Indirect expenses Total cost = Direct cost/prime cost + Indirect cost/overhead Total expenditure may therefore be analysed as follows. ✓ Product cost are costs identified with goods produced or purchased for resales. ✓ Period cost are costs deducted as expenses during a particular period www.com 21 Cost classification A Cost behaviour is Fixed cost the way in which costs are affected by changes in B volume of output Variable cost C Semi- Variable cost D Stepped- fixed cost www.com 22 Cost classification Variable cost: cost are changed in direct proportion to the level of activity such as direct material, direct labour • Variable cost in total: changes at the same rate as the level of activity www.com 23 Cost classification Fixed Costs: Costs are not affected in total by the level of activity • Fixed cost in total • Fixed cost per unit www.com 24 Cost classification • Semi-variable cost • Stepped cost www.com 25 Cost classification Relevant range • The relevant range: The relevant range is the range of activity levels within which assumed cost behaviour patterns occur. • The relevant range also broadly represents the activity levels at which an organisation has had experience of operating in the past and for which cost information is available.
• It can therefore be dangerous to attempt to predict costs at activity levels that are outside the relevant range www.com 26 Cost classification For control purpose • For control purposes the most effective classification of costs is by responsibility. • Responsibility accounting: Responsibility accounting is a system of accounting that segregates revenue and costs into areas of personal responsibility in order to monitor and assess the performance of each part of an organisation. • A responsibility centre: A responsibility centre is a department or function whose performance is the direct responsibility of a specific manager.com 27 Cost classification For control purpose • Controllable cost: A controllable cost is a cost that can be influenced by management decisions and actions. • Uncontrollable cost: An uncontrollable cost is a cost that cannot be affected by management within a given time span.com 28 Cost classification For control purpose • A cost that is not controllable by a manager in one department may be controllable by a manager in another department.
• Costs are controllable, but in the long term rather than the short term www.com 29 Ethics ICAEW ethical guidance for accountants • Fundamental Principle 1 – 'Integrity' – A member should behave with integrity in all professional and business relationships. – Integrity implies not only honesty but fair dealing, truthfulness and being straightforward. A member’s advice and work must be uncorrupted by self-interest and not be influenced by the interests of other parties. A member should not be associated with information that is false or misleading or supplied recklessly.com 30 Ethics ICAEW ethical guidance for accountants • Fundamental Principle 2 – 'Objectivity' – A member should strive for objectivity in all professional and business judgements.
– Objectivity is the state of mind which has regard to all considerations relevant to the task in hand but no other. There should be no bias, conflict of interest or undue influence of others.com 31 Ethics ICAEW ethical guidance for accountants • Fundamental Principle 3 – 'Professional competence and due care' – When providing professional services 'professional competence and due care' therefore mean: • Having appropriate professional knowledge and skill • Having a continuing awareness and an understanding of relevant technical, professional and business developments • Exercising sound and independent judgement • Acting diligently, that is: o Carefully o Thoroughly o On a timely basis and o In accordance with the requirements of an assignment • Acting in accordance with applicable technical and professional standards • Distinguishing clearly between an expression of opinion and an assertion of fact www.com 32 Ethics ICAEW ethical guidance for accountants • Fundamental Principle 4 – 'Confidentiality' – The professional accountant should assume that all unpublished information about a prospective, current or previous client's or employer's affairs, however gained, is confidential. Information should then: • Be kept confidential (confidentiality should be actively preserved) • Not be disclosed, even inadvertently such as in a social environment • Not be used to obtain personal advantage www.com 33 Ethics ICAEW ethical guidance for accountants • Fundamental Principle 5 – 'Professional behaviour' Behaving professionally means: • Complying with relevant laws and regulations • Avoiding any action that discredits the profession (the standard to be applied is that of a reasonable and informed third party with knowledge of all relevant information) • Conducting oneself with: – Courtesy and – Consideration When marketing themselves and their work, professional accountants should: • Be honest and truthful • Avoid making exaggerated claims about: – What they can do – What qualifications and experience they possess • Avoid making disparaging references to the work of others www.com 34 Ethics Threats and safeguard • Threats created where a professional accountant in business is pressured to become associated with misleading information or to become associated with misleading information through the actions of others. • The significance of such threats depends on factors such as the source of the pressure and the degree to which the information is, or may be, misleading www.com 35 Chapter 2: Calculating unit costs (Part 1) www.
Identifying direct and indirect costs for cost units 2. Inventory valuation www.com 37 Direct/Indirect cost Prime cost = Total Direct costs Prime cost (Direct cost) Raw material cost Direct labour cost Direct expenses Various components of prime cost www.com 38 Direct/Indirect cost • Classify direct or indirect cost of a particular car repair in a garage www.com 39 Direct/Indirect cost Further points ✓ Direct costs are not necessarily bigger in size than indirect costs ✓ Indirect costs are not less important than direct costs ✓ It is easy to confuse fixed and variable costs with indirect and direct costs.com 40 Inventory valuation Valuing inventory in financial accounts (IAS 2) Lower between - Cost - Net realisable value Valuing inventory for cost of production or cost of sales - FIFO - LIFO - AVCO www.com 41 Inventory valuation Example: The Bike Company (TBC) Date Activities Quantity Unit cost Total 1 Aug Beginning 10 91 910 3 Aug Purchase 15 106 1,590 14 Aug Issue 20 17 Aug Purchase 20 115 2,300 28 Aug Purchase 10 119 1190 31 Aug Issue 23 www.com 42 Inventory valuation Inventory cost flow assumptions First-In, First-Out Assumes costs flow in the order (FIFO) incurred. Last-In, First-Out Assumes costs flow in the (LIFO) reverse order incurred. Weighted Assumes costs flow at an Average average of the costs available.com 43 Inventory valuation FIFO Oldest Costs of Costs Goods Sold Recent Ending Costs Inventory Often parallels actual physical flow of stock.
Generally good business practice to use oldest units first.com 44 Inventory valuation FIFO Inventory Inventory Date Date Purchases Purchases Cost of Cost of Goods Goods Sold Sold Balance Balance Aug. 14 10 @ $ 91 = $ 910 10 @ $ 106 = $ 1,060 $ 530 The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory.com 45 Inventory valuation FIFO Inventory Date Purchases Cost of Goods Sold Balance Aug. 3 $ 2,500 Income15Statement @ $ 106 = $ 1,590 14/8 Aug. 31 5 @ $ 106 = $ 530 18 @ $ 115 = $ 2,070 $ 1,420 2 @ $ 115 = $ 230 Balance Sheet 10 @ $ 119 = 1,190 Inventory = $1,420 End.